Credit cards way past due? Call the company anyway.

Credit cards went unpaid for months, so what now? That's question No. 2 in the reader mailbag.

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What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Secured credit card?
2. Contacting credit card companies
3. Concerned about Mom
4. Time to switch cars?
5. Mint or Thrive?
6. Consolidate now or later?
7. Re-fi with PMI
8. Building credit (or not)
9. Using a Roth for savings
10. Consolidating public loans

If you want to say something but don’t think you have the words to say it right, just push through anyway. You’re far better off stumbling over a few words with the sincerity shining through than just choosing to keep your mouth shut and not letting the other person know.

The above was written for someone specific. Hopefully, it’ll help you, too.

Q1: Secured credit card?
Last year my husband’s credit card was cancelled for late payments. It had been at least 6 months since we were late on a payment, and that was because he was injured and couldn’t work for 3 months. He had had that card for several years with an excellent payment record but it transferred ownership (e.g., from Paypal to Washington Mutual to Chase) and we think Chase just dumped him because he had a low limit ($1,000).

Anyway, his credit is now in the toilet. We will want to sell our current home in the next few years and buy a better place. Would it be worth it to get him one of those secured credit cards in order to improve his credit? And are there any that won’t penalize us for paying the balance in full each month? I’d appreciate it if you’d steer us in the right direction.
- Lisa

Most secured credit cards I’m familiar with allow you to pay the full balance each month penalty-free.

A secured credit card works just like a regular credit card except that you have to pay a security deposit when you open the card. This is to protect the bank, because as a person with low credit, you’re a pretty high risk of just not paying your bills at all.

As for which specific card to choose, that’s really hard to say without more information about your specific situation. My suggestion would be to search for one yourself, perhaps starting with the financial institution you trust the most.

Q2: Contacting credit card companies
My husband lost his job at the beginning of 2010. With not much of an income coming in and struggling to keep food on the table and electricity on etc, we stopped paying on our credit cards in an effort to help have a little more to work with through the months. Looking at things now, I’m sure stopping payments altogether was probably NOT the best solution but they seemed like the least of our worries. When they called, we did not answer. That too I know is not a wise decision, but without an answer on how they could have payment, I just didn’t know what to say. My husband will be going back to work very soon and will be making a significant amount more than what we are bringing in now. I want to make things right and pay the credit card companies but I don’t know where to begin! We have 4 cards. One through Chase, one through Capital One, and two store cards who go through HSBC and GEMoney Bank. Over the few months we have received letters saying if we pay now they’ll let us pay only XX amount or call to set up a payment arrangement and we’ll work with you…but we didn’t call because we didn’t have anything to give. All of these had expiration dates. The latest letter we got from one company says to pay the entire outstanding balance to avoid additional collection efforts. If we don’t they will charge off the account and the debt may be sold to a collection agency. Are we past the point of them working with us?
- Shelby

Not necessarily. The best thing you can do is simply contact these companies as soon as you possibly can to work out a payment arrangement that works for both of you.

For the most part, those letters were an attempt to get your attention and get some sort of payment plan worked out, which is the resolution they would prefer in comparison to selling your debt for pennies to a collection agency. They’d rather collect 50% of the debt from you than 2% of it from a collection agency.

The sooner you deal with this, though, the better in terms of your credit history. The longer you wait, the greater the negative impact on your credit report and the worse your credit rating will be.

Q3: Concerned about Mom
I’m a college graduate with a fairly secure job living in a reasonably priced city and although I do have significant credit and student loan debt as well as a car loan, my combined income is enough to allow me to live comfortably, contribute to a retirement fund, 403b, and make major payments toward this debt each month. My husband and I also have a comfortable emergency savings, and home savings fund we contribute to monthly. While I know there is more I could personally do to get my debt paid off faster, I’m more concerned with my mother’s finances.

For most of her life, she’s worked sporadically at odd part time jobs in between pursuing a freelance art career and raising a family. She was largely financially dependent on a long term boyfriend until three years ago when they separated. Since then, I’ve taken on bailing her out of financial situations from minor–the phone is being turned off–to major–the furnace needs to be replaced. Needless to say, bailing her out has not been added to my long term financial plan, or my monthly budget, so often these bailouts come at my expense. She’s approaching sixty, and with her work history I’m sure that she won’t receive much in the way of retirement or social security funds, and I worry about her financial outlook in the future. As it stands, my husband and I would more than likely have to foot the bill if there were serious medical or hospice care needs in the future. While I know I should start saving for this inevitability is there anything now that I can do to help mitigate these costs? I had considered buying her a savings bond for Christmas, but I’m not sure if that would be the most cost effective way to invest money towards her future.
- Angel

Right now, you and your husband need to sit down and decide whether you’re going to be supporting her for the rest of her life. That’s an intensely personal decision – taking care of her will hurt your long-term financial future, but not taking care of her means pushing your mom into a scary financial future.

I think there are valid reasons to do both and I don’t think either one is morally superior to the other, mostly because of the idea that if you spend the next ten years getting your own financial house as strong as possible without concern for your mom, you can then step in to make her final years go quite well.

The key here is that you’re honest with your husband and that you’re both committed to doing things together in this regard. I don’t get the impression that your mother will choose to take care of her own finances by herself, so it’s going to be up to you to make this decision.

Q4: Time to switch cars?
My husband and I just moved from DC to Maryland and need to change our vehicle registration. I have a 1995 Acura Integra in pretty poor condition with 200,000 miles that I own outright. It runs great, but it is likely to not pass MD inspection and needs $1000-$2000 in repairs. We only drive it once a week and average about 4000 miles per year. We have about $3000 saved up for a down payment on a car and could supplement with savings if needed. Is it time to donate and get a new car?
- Laura

Considering that you could get a better car that would pass Maryland inspection for that $3,000, it’s probably a good move to upgrade your car at this point.

You may want to consider donating the car to an organization in an area where the car will be drivable – in other words, donate it to a charitable group that can use it outside of Maryland.

Of course, I’m assuming you’ve considered living without the car and judged it to not be a good idea. If you only drive it once a week, I’d strongly consider the carless option before discarding it.

Q5: Mint or Thrive?
Just wondering if you could compare these two sites . . . benefits, downfalls, who can benefit from each one, etc.?
- Amy

I do not use Mint or Thrive for one simple reason: the aggregation of all of my personal finance information in the hands of a single company, even one with a stellar record for security, isn’t worth the risk to me.

I’m not worried about computer error. What worries me is human error and/or poor ethics. All it takes is one individual human slipup or one person with bent ethics and access to Mint or Thrive servers to cause your information to be routed elsewhere. That makes me nervous.

I’m okay with online banking because the bank already has my information. I was okay using Wesabe before they went defunct because they didn’t request my account information. Mint and Thrive? I just can’t see how using them is worth that risk.

Q6: Consolidate now or later?
I’ve got two semesters left in my Masters degree in Music, and I’m pretty certain I’m coming up close to 100k (if I did my debt snowball correctly). Some are from private lenders, but most are government loans. My main question is this: does it make sense to consolidate loans while I’m still in school (i.e. – still taking out more loans), or should I just wait until I’m done with school? Another option would be to consolidate the non-government loans since I should not have to take out any more private loans, what do you think?

As far as other financial avenues of my life, my only other debt is my car (~$2160, at ~$180/mo.) which will be paid off in a year. I’m contributing regularly to an Emergency Fund (currently $20/mo). I have around $100 now, and I’m aiming for $1000 as my first goal. I work at least 20 hours a week making $9.50/$10.00 an hour depending on which job it is. I’m getting ready to sell my old instrument which could bring in $2500-3k.

My plan is to pay off the car, then put the remaining money toward the EF, and contribute to that monthly (~3 mos.) until it’s at $1k.

After that I’d like to start paying off some of my smaller private loans, which is another thing I’m not sure about how to do. Here’s an example: I have a private loan for $500 at 12.523% interest (this is the highest rate on my student loans, most are 6-9%). It’s accruing interest now, but payments are deferred. Would it be kosher for me to call the loan company and offer to pay the principal (and accrued interest?) outright to get rid of the loan? I would think that they would rather me pay them what I currently owe them now than for them to get a little at a time over the next 10-20 years, but then again I don’t know if they’d go for that.
- Phil

First of all, generally you cannot consolidate private loans that aren’t backed by the government with loans that are backed by the government. Thus, you’re going to have to deal with the private loans separately from any consolidation.

Your first step would be to make a list of all of your private loans, then a separate list of all of your public loans that are eligible for consolidation – check this list. I would then see if I could find a consolidation package that would reduce the interest rate of all of your public loans – if you can’t, then just consolidate the ones that result in a lowered rate.

After that, start knocking off the private loans, starting with the highest interest rate loans. Don’t be afraid to knock off the loans early and don’t be afraid to completely eliminate them if you have the resources to do so.

Q7: Re-fi with PMI
We currently have a 30-year fixed mortgage with a rate of 5.25% through our credit union. Our original loan amout for this mortgage was $232,800 with an original loan date of 2/3/2009. At the time of this loan, our home appraised for $275,000. We currently pay $1285.53 in principal and intrest and $53.62 in PMI every month.

We have recently inquired about a re-finance with a different bank that offers VERY low closing fees. The new loan would be a 30-year fixed mortgage with a rate of 4.25%. The closing costs, which include the credit check, appraisal, etc. would be $350 (total). The loan amout would be $230,000 and we would likely close sometime in December 2010. The bank has quoted me at $1131.46 per month for principal and interest and $103.50 in PMI per month [as long as the house were to appraise at $275,000 (or more), which is quite realistic given that the real-estate in our neighborhood is still comparable to what it was when we last refinanced].

Other information that may be relevant…. My husband and I have both had excellent credit scores for the past several years (i.e. at least 770 or above) and nearly everything else in our financial picture has improved over the course of the past few years (i.e. less debt, better credit, more in savings, 401K, etc.).

I have tried to do some calculations using amortization tables and such and while I realize that my payment will drop by approximately $50 per month, I am wondering if it is really worth it (over the long haul) to refinance at this time given that we will be paying more for PMI? Can you help me get my hands around this? Any advice?
- Christine

The important thing to remember is that your PMI will only exist for a limited time – until your mortgage balance is 80% or less than the appraised value of your home. Once you reach that point, the PMI vanishes.

I would absolutely take the lower-interest loan with the higher PMI. Channel the monthly savings into extra loan payments and get to that 80% mark as quickly as possible, at which point you’ll be in far better shape than you were before.

PMI is a temporary thing. Your interest rate lasts for the lifetime of the loan.

Q8: Building credit (or not)
My son will be 17 years old in a few weeks. He will be buying a truck for cash from his Grandpa. It will cost $1,500. I am wondering if it would build his credit to give him three different $500 checks over several weeks?
- Chris

If this is just a cash transaction between two individuals, it will have no bearing on his credit rating.

The only way this can impact his credit rating is if a bank is involved. A bank would have to issue a formal loan to your son for the truck, which would then be reported to the credit agencies. Then, your son could pay off that loan, resulting in a fully paid loan appearing on his credit report.

It might be worth it to stop at your local bank and talk to the lender about this, purely for the reason of establishing good credit for your son.

Q9: Using a Roth for savings
I am a stay-at-home mom fully funding my roth. Husband puts 10% of pre-tax into his company 403B getting the full company match. We have our emergency fund fully funded and sitting in an online savings account (earing 1.15%). We are committed to not touching it unless it is absolutely needed. Now that we have fully funded the e. fund we want to start saving of other goals (redo laundry room, big screen tv, Disneyland vacation, etc). These goals are between two and five years out. I’m wonderind where we should save money for our other goals. One thought was group it with the e. fund knowing that we never let it go below a certain point, however this concerns us because in the past we’ve dipped into our e.fund for things that were no emergencies. Our financial advisor suggested that we open a Roth for my husband with the intention of using it for these goals, not strictly for retirement. His arguement was that we’d be building up the interest earnings over the years so it would be a nice bonus for us during retirement, while also allowing us to build up our savings for those shorter term goals. Retirement isn’t too much of a concern because we are on track right now to have over $4 million in husband’s account and around $700,000 in my roth at 65. What do you think we should do for those 2-to-5 year goals?
- Jennifer

That plan makes reasonable sense to me. You’re essentially just foregoing the small amount of interest you’d earn in a regular savings account in order to bolster your retirement savings a bit more.

There are only a couple of small drawbacks. One, your annual cap on the Roth is $5,000. I don’t know how much you’re saving, but if it’s more than that, you’ll have to use other methods to supplement it.

Two, you won’t earn any return immediately on that money – the returns will be untouchable. At the same time, your money is at risk in the account unless you invest very, very conservatively.

I would still follow this plan in your shoes, however.

Q10: Consolidating public loans
I have a whole bunch of student loans for grad school. The interest rate is a relatively high 6.5 and 8.5%. I called the lender but was told that grad loans (stafford subsidized and unsubsidized loans) cannot be refinanced. Do you know if this is true? Any options you can see?
- Gal

They cannot be refinanced, but they can be consolidated if you’ve not already consolidated them, which it sounds like you did not.

If I were you, I’d start at http://loanconsolidation.ed.gov and look into consolidation. Those interest rates aren’t horrible, but you certainly should be able to lower them a bit, especially the 8.5% loans.

Good luck!

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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